“We see that the economy is cooling down, but inflation is still too high. An increase in the policy rate now reduces the risk of inflation remaining high for a long period of time. The policy rate will likely be kept at 4.5 percent for some time ahead”, says Governor Ida Wolden Bache.

Inflation has been somewhat lower than expected but is still markedly above the 2 percent target. At the same time, business costs have increased considerably over the past few years, and there are prospects for continued high wage growth. The krone has depreciated further. This will keep inflation elevated ahead despite an easing of international price impulses. Employment is high, and unemployment remains low.

The policy rate is likely close to the level required to return inflation to target within a reasonable time horizon. The Committee is concerned with balancing the risk of tightening too much against the risk of tightening too little. The economy is now cooling down, and the full effects of the past rate hikes have yet to be seen. On the other hand, inflation is high, and the krone depreciation makes it more challenging to bring down inflation. An increase in the policy rate now will reduce the risk of inflation remaining high for a long period of time.

The Committee assesses that a tight monetary policy stance will likely be needed for some time ahead in order to return inflation to target within a reasonable time horizon. Further out, when inflation falls back and economic conditions so warrant, the Committee can start lowering the policy rate.

Compared with the forecast in the previous Report, the policy rate forecast is little changed in the near term but is somewhat lower further ahead. The forecast indicates that the policy rate will lie around 4.5 percent until autumn 2024 before gradually moving down.

There is uncertainty about future developments in the Norwegian economy. If cost inflation remains elevated or the krone turns out to be weaker than projected, price inflation may remain higher for longer than currently projected. In that case, the Committee is prepared to raise the policy rate again. If there is a more pronounced slowdown in the Norwegian economy or inflation declines more rapidly, the policy rate may be lowered earlier than currently envisaged.

Norges Bank will hold a press conference following the monetary policy decision in January.